Markets
Groundhog day on US interest rate markets. At the end of April, US money markets were positioned for a first Fed rate cut at the December. It made them vulnerable to soft patches in eco figures. By mid-May, the pendulum swung to a first rate cut in September with follow-up action in December. At this stage, investors picked-up the more hawkish/inflationary details again. At the end of May, they arrived back where they started a month earlier: discounting only one 25 bps rate cut by December. Which made them vulnerable to… soft patches in eco figures. Yesterday’s May US manufacturing ISM immediately pulled the right/wrong strings. The headline figure showed a modest setback, from 49.2 to 48.7 instead of the longed-for modest improvement to 49.5. Apart from March 2024 (50.3), the manufacturing sector has been shrinking since November 2022. Details showed a very small rise in production levels (50.2). New (domestic) orders fell at a significantly faster pace (45.4 from 49.1) but got some buffer by rising export orders (50.6 from 48.7). Manufacturers continue to work through inventory backlogs. The prices paid index decelerated from 60.9 in April to 57 which nevertheless remains the second fastest price growth since August 2022. The report ended on a bright note with the employment subindex growing for the first time since September (51.1 from 48.6). Markets solely focused on weakening demand in the ISM, triggering a rally in US Treasuries. US yields lost 6.5 bps to 11.1 bps (30-yr). The curve move already suggests that something else was at play as well. Oil prices are the culprit. Brent crude started slipping around the start of the US session and the move continued after the ISM. The move is partly supply-inspired (following this weekend’s OPEC+ meeting including scaling back some production cuts from September), partly because of technical reasons (acceleration after losing YTD bottoms around $80.5/b) and partly demand-driven (ISM details). In the end, Brent crude lost almost $3/b, taking the weekly loss to $7/b (currently $77.5/b) and directly impacting long term rates via inflation expectations. German Bunds followed US T’s higher with the belly of the curve outperforming the wings. German yields lost 6.8 bps (2-yr) to 8.8 bps (30-yr). The dollar suffered from both the ISM and lower oil prices (positive correlation since US turned net exporter). EUR/USD closed above the 1.0884/95 resistance area (1.0904). If confirmed, this suggests room to head towards 1.10. The combination of ECB meeting and other key US eco data later this week (services ISM, ADP, payrolls) makes it too soon to call this resistance already definitely broken.
News & Views
South Korean inflation slowed further in May to 2.7% Y/Y from 2.9% (vs 2.8% consensus), touching the lowest level since July last year. The monthly pace of price growth remains low at 0.1% M/M after an unchanged reading in April. Core inflation excluding food and energy also eased from 2.3% Y/Y to 2.2%, the slowest pace since December 2021. Food prices declined by 0.7%, slowing the Y/Y-measure to 5.1% from 5.9%. Transport related costs were source of upward price pressure, adding 0.6% M/M and 3.8% Y/Y. After the publication, the Bank of Korea acknowledged the progress in inflation, but it is still looking for further evidence that inflation is converging towards its 2% inflation target. The BoK last month kept its policy rate unchanged at 3.5%. However, its assessment at that time was seen as tilting to the softer side, despite an upward revision to the growth outlook. The won is still trading at historically weak levels and might be a reason to stay cautious on starting a protracted rate cut cycle.
Data from the British Retail Consortium showed that total UK retail sales increased 0.7% Y/Y in May. This was above the 3-month moving average of 0.3%, but below the 10 month average growth of 2.0%. BRC assess the May sales development as “a mild recovery”. Food sales increased 3.6% Y/Y in the three months to May. However, non-foods sales decreased 2.4% 3M Y/Y, which is a steeper decline than the 12 month average of -1.7%. Non-food sales also were lower compared the same month last year. BRC said that “despite a strong bank holiday weekend for retailers, minimal improvement to weather across most of May meant only a modest rebound in retail sales last month”. Looking froward, “retailers remain optimistic that major events such as the Euros and the Olympics will bolster consumer confidence this summer”.
